Can Trump's Tariffs Restore US Manufacturing?

Jordan Times

19-04-2025

SEOUL – Earlier this month, after US President Donald Trump introduced high 'reciprocal' tariffs on 57 countries running trade surpluses with the United States, the stock market plunged, the dollar slid, and US Treasury yields climbed. Within 24 hours of the tariffs taking effect, Trump announced a 90-day 'pause' on most of them, though a 10 per cent baseline tariff remains in effect, and tariffs on most Chinese imports have continued to climb in a rapidly escalating trade war. Despite the pause, Trump continues to insist that tariffs are essential to bring manufacturing back to the US.
America's own historical experience – particularly the Smoot-Hawley Tariff Act of 1930 – is often cited as evidence of the profound damage tariffs can do. But East Asia has successfully used tariffs to help it build up a strong manufacturing base. Unfortunately for the US, there are important differences between the approach that worked in East Asia – in particular, South Korea – and the approach taken by the Trump administration.
For starters, South Korea's tariffs were asymmetric: very high for consumer goods (such as household electrical appliances), which it sought to promote as export industries, and very low for the capital goods (such as machinery) that it needed for manufacturing. Without those low capital-good tariffs – together with low wage rates – South Korea could not have established itself as a low-cost production hub.
The US already has higher labor costs than the countries from which it is attempting to 'bring back' manufacturing. Add high and sweeping tariffs to the mix, and the country becomes an extremely costly place to do business – so costly, in fact, that some Korean companies have reportedly determined that keeping production at home is still a better bet than building new factories in the US.
In other words, rather than encouraging foreign direct investment (FDI) in local manufacturing, Trump's tariffs are deterring it. To align objectives more closely with incentives, the Trump administration should integrate FDI into the calculation of any country-specific tariff. So, before dividing the US trade deficit in goods with a given country by total goods imports from that country (and then dividing that number by two) – the current approach – the Trump administration should subtract the target country's FDI from the trade deficit. The higher the FDI, the lower the tariffs.
It is worth noting, however, that even this adjustment would not be enough to correct the flaws in the Trump administration's calculations, exemplified by the imposition of a 25 per cent tariff on South Korea, which taxes the vast majority of US imports at a rate of less than 1 per cent, on average. The Trump administration's approach also fails to account for the vast disparities among target countries' industrial structures and income levels: a 37 per cent tariff on Bangladesh is almost as difficult to justify as a 50 per cent tariff on Lesotho.
In any case, the tariffs themselves are only part of the puzzle. Another crucial component of South Korea's strategy for building its manufacturing base was its suppression of interest rates and allocation of low-cost loans for manufacturers. These interventions ensured that private investment flowed toward manufacturing, rather than toward finance and other services, which offered high profitability over shorter time horizons.
For the US, making manufacturing more attractive for investors than, say, finance, education, and entertainment would be much more difficult – and not only because these service industries are already highly profitable and globally competitive. South Korea's government had considerable control over the interest rates charged by commercial banks, and it wielded discretionary power over credit allocation. Other state-owned institutions – such as the Korea Development Bank, which manages long-term lending for capital investment, and the Export-Import Bank of Korea, the country's official export credit agency – also helped.
Even if the US did manage to keep interest rates low and direct more financial flows into manufacturing sectors, ensuring those sectors' long-term competitiveness would be no easy feat. South Korea achieved this by leveraging its relatively closed financial system and a business environment dominated by large, family-owned conglomerates (chaebols) subject to significant government oversight.
Given their legacy-oriented mindset, chaebols are inclined to take a long view. But the government made sure that they channeled the extra profits that domestic market protections enabled into long-term fixed-capital investment, while ensuring that the financial sector also took a long-term approach. This meant that a company like Hyundai continually invested its profits in making better cars at lower prices for domestic markets, while generating high-paying local jobs. So, though Korean consumers faced higher car prices in the tariffs' early years, they reaped major benefits over time.
But in the US, shareholder capitalism reigns, which means that profits are often used to pay off shareholders, such as through dividends or buybacks. There is little reason to think that, in America's finance-led, short-term-oriented economic system, any added profits that tariff protections bring would lead to long-term investment in manufacturing.
If the Trump administration is committed to rebuilding America's manufacturing capabilities, it should focus on specific sectors, using policy levers to lower the costs of critical inputs and potentially making direct investments. The US cannot and should not seek to become a producer of clothing or footwear again, but it might be able to nurture more knowledge-intensive industries that offer significant economic or security benefits.
If the Trump administration sticks to its current approach, it will not only fail to make the US a manufacturing powerhouse; it will also alienate America's trading partners, destroy its international credibility, and undermine global stability. The country that stands to gain the most is China.
Keun Lee, a former vice chair of the National Economic Advisory Council for the President of South Korea, is Distinguished Professor of Economics at Seoul National University, a fellow at CIFAR, an editor at Research Policy, and the author, most recently, of Innovation-Development Detours for Latecomers: Managing Global-Local Interfaces in the De-Globalization Era (Cambridge University Press, 2024). Copyright: Project Syndicate, 2025. www.project-syndicate.org